Economic experts, political pundits, and marketplace wizards have made much of America’s looming federal “fiscal cliff”. It has become commonplace to declare that not only for the near term, but also for the misty long run horizon, difficult decisions await the Washington leadership. Of course the nation has assets. However, there has been much less emphasis on America’s “debt hole”, the enormous indebtedness of America as a whole (not just the federal government situation) as a percentage of nominal GDP.

The debt growth trend in recent decades and its mountainous overall level argue that a culture of debt (and entitlement) exists in the United States. Rising debt as a percentage of GDP preceded its acceleration during the glorious Goldilocks Era that ended around mid to late 2007. Since the so-called recovery began to motor forward in 2009, overall United States indebtedness has not declined much. Though consumer indebtedness has declined modestly in the past few years, federal indebtedness has skyrocketed. Thus in a representative government, people (“we, the people”) correspondingly remain very indebted.

And is the President or any of the Congressional Democrats or Republicans in their undoubtedly brilliant “plans” talking of the merit of engineering budget surpluses at any time in the next several years (if ever)? In addition, smoothly singing its mandate hymn, the financial fire-fighting Federal Reserve devotedly has assisted debtors by repressing interest rate yields, printing money (quantitative easing), and other measures. This highly accommodative and sustained central banking liberality not only assists debtors. The Fed thereby provides short term benefits such as boosting GDP, rallying the US stock marketplace, reducing unemployment, and buying time for a fiscal solution. Might there be some long run costs to such supposedly prudent Fed actions? For example, these generally popular Fed policies nevertheless also reflect and encourage the debt culture and delay difficult (responsible) political decision-making and consequently some amount of painful reckoning.

What is the more probable outlook? Perhaps patching over the US’s debt problem, particularly on the federal landscape, will occur, thus easing fears regarding the outbreak of a financial disaster. On the federal fiscal front, the passing of and results of the 2012 election may spark bipartisan efforts that result in a temporary fix of existing difficulties. However, as before the election, there is a Democratic President, Democratic Senate, and a Republican House of Representatives. Remember the lyrics of a famous anthem by The Who: “Meet the new boss Same as the old boss” (“Won’t Get Fooled Again”). And in the Senate, the Democratic majority is several seats short of the 60 votes necessary to stop legislative debates. Even to induce an attractive temporary fix, it is more likely that fearsome existing debt troubles probably will have to worsen further. And don’t overlook the need to raise the debt ceiling again.
Read the rest of this entry »